Tracking rising temperatures is becoming a better way of forecasting food inflation in India than the rain patterns economists have typically relied on, according to HSBC Holdings Plc.

The link between extreme heat, exacerbated by climate change, and the price of agricultural commodities in India has strengthened over the past decade, the bank said in a report released Thursday. The correlation between temperatures and cost of perishable staples such as fruit and vegetables in the country rose to 60% this year from 20% in 2014, it said.

Inflation remains well above the Reserve Bank of India’s 4% target due to volatile food costs, prompting the authority to hold its policy rate for the last year and a half.

HSBC said it expects consumer-price gains to ease toward the end of the year as temperatures drop after the summer heat wave. But “over the medium term, rising temperatures could become a big problem for inflation management,” it said.

Analysts used to estimate food inflation changes by looking at the levels of India’s reservoirs, a measure that the bank’s economists said may soon become obsolete.

This is possibly due to improved irrigation systems that mitigate the impacts of scarce rainfall, while there is currently no solution to shield crops from extreme heat, they said.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

Food prices rose 1.14% over April levels. Image used for representative purpose only. 
| Photo Credit: K. Murali Kumar

Inflation in India’s wholesale prices accelerated to a 15-month high of 2.61% in May, more than double April’s pace, with food inflation surging to a 10-month peak of 7.4% driven by steeper prices for vegetables, fruits, pulses and cereals, and a resurgence of price rise in manufactured products after 14 months of decline.

Economists said the rise in wholesale inflation in May signals there is room for a further surge in consumer prices despite retail inflation easing to a 12-month low of 4.75% last month, especially as food and industrial input prices are spiking globally. May was the seventh month in a row that the WPI rose on a year-on-year basis after seven consecutive months of decline, and it is expected to rise over 3% this month.

On a month-on-month basis, the Wholesale Price Index (WPI) was up 0.2% in May, easing from a ten-month high of 0.8% a month earlier, with food prices rising 1.14% over April levels and manufactured products’ prices up 0.64%.

The heatwaves in May helped fire up the inflation rate for vegetables to the highest level in nine months at 32.4%, and a six-month high of 5.8% for fruits. Price rise in cereals sped to 9%, while that for pulses reversed direction to hit a six-month high of 22%.

Within vegetables, tomato prices were up 64.5% in May from 40.6% in April, while inflation in onion and potato dropped slightly to a tad over 58% and 64%, respectively. Bank of Baroda chief economist Madan Sabnavis said these spikes in vegetable prices were partly due to supply shortfalls and the heat wave aggravated the challenge. “This is a major concern as it will keep up the pressure on the inflation till the next crop comes,” he told The Hindu.

India Ratings flagged similar concerns about pulses prices remaining elevated in double-digits as the new crop would be harvested only in October-November. “Elevated food inflation at the wholesale level is worrisome as this would keep retail food prices firm even going forward. Retail food inflation has been above 8% for the past seven months,” said the firm’s senior director and principal economist Sunil Kumar and senior analyst Paras Jasrai in a note.

India Ratings expects retail food inflation to remain over 8%, with wholesale prices expect to rise further to 3.5%, in June. CareEdge Ratings’ chief economist Rajani Sinha also pointed out that industrial metal prices have risen 9.3% since March-end and food prices are increasing globally.

“Positive rate of inflation in May is primarily due to increase in prices of food articles, manufacture of food products, crude petroleum & natural gas, mineral oils, other manufacturing, etc,” the Commerce and Industry Ministry said.

With prices rising 17.14% in May, pulses have now completed a year of over 10% inflation. File
| Photo Credit: The Hindu

India’s consumer price inflation eased a tad from 4.83% in April to a one-year low of 4.75% in May, but food price rise remained unchanged at 8.7%, with urban households facing a sharper 8.83% spike in food inflation. Retail inflation stood at 4.31% in May 2023, with food prices rising less than 3%.

May was the fourth successive month with food inflation of over 8.5%, though it cooled fractionally for rural consumers from 8.75% in April to 8.62%. On a month-on-month basis, the Consumer Price Index (CPI) was up 0.5% in May, while the food price index had risen 0.73% from April’s levels. The sequential rise in food prices was 0.7% for rural consumers and 0.9% for their urban counterparts.

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The gap between urban and rural consumers’ inflation trends was sharp for the third consecutive month, with rural households seeing a 5.3% rise in prices in May. For urban consumers, the retail inflation pace was 4.15%, just fractionally higher than 4.14% in March and 4.11% in April.

While retail inflation has now been below 6% since September 2023, it is still far from the central bank’s 4% target. The Reserve Bank of India (RBI) expects retail inflation to average 4.5% this year and has projected an average of 4.9% for the April to June quarter. With April and May inflation coming in slightly below that, it is likely that price rise may resurge to over 5% this month.

Vegetable prices

Barring spices, where the inflation rate cooled to 4.3%, the lowest level in at least two years, price pressures persisted for most food items. Vegetable prices rose 27.3% in May, while the inflation rate accelerated for cereals (8.7%), eggs (7.6%), fruits (6.7%) as well as pulses. With prices rising 17.14% in May, pulses have now completed a year of over 10% inflation.

Meat and fish prices were up 7.3% in May, easing a tad from 8.2% in April. Edible oil prices were down 6.7% from last year compared with a 9.4% dip in April, making it the mildest decline in prices in at least 14 months.

Terming the rising inflation in key food items such as cereals and pulses, and the rigidity in vegetable prices as worrying, Crisil principal economist Dipti Deshpande said the progress of the southwest monsoon would influence the food inflation trajectory over the next few months and there could be softening this month.

Also Read : Extreme weather may pose risk to inflation, says RBI Bulletin

“Non-food inflation continues to offer respite, printing at a record low of 2.3%. Much of this was due to core sliding to 3%, also a record,” she noted.

“A favourable base effect is expected to persist till July 2024, helping absorb potential upward risks to price pressures to a certain extent. If food inflation moderates, we expect the RBI to cut the policy interest rate by a shallow 50 basis points in two tranches in the second half of the fiscal year,” said CareEdge Ratings’ chief economist Rajani Sinha. One basis point equals 0.01 per cent.